-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ac6c0s+yiqyhb9WO9k/UiCBpgsqRV5VlmkG9EFJUP7q0+0IzNM0sdjmWyIjDHvYE E6NGSN1G+w+O2bzOqGcyzQ== 0000950129-99-004924.txt : 19991115 0000950129-99-004924.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950129-99-004924 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APACHE CORP CENTRAL INDEX KEY: 0000006769 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 410747868 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04300 FILM NUMBER: 99747334 BUSINESS ADDRESS: STREET 1: 2000 POST OAK BLVD STREET 2: ONE POST OAK CENTER STE 100 CITY: HOUSTON STATE: TX ZIP: 77056-4400 BUSINESS PHONE: 7132966000 MAIL ADDRESS: STREET 1: 2000 POST OAK BLVD STREET 2: STE 100 CITY: HOUSTON STATE: TX ZIP: 77056-4400 FORMER COMPANY: FORMER CONFORMED NAME: APACHE OIL CORP DATE OF NAME CHANGE: 19660830 10-Q 1 APACHE CORPORATION - DATED 09/30/99 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to ------------------- --------------------- Commission File Number 1-4300 APACHE CORPORATION ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) Delaware 41-0747868 ------------------------------- ---------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) Suite 100, One Post Oak Central 2000 Post Oak Boulevard, Houston, TX 77056-4400 ---------------------------------------- ------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (713) 296-6000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Number of shares of Registrant's common stock, outstanding as of September 30, 1999.....................114,083,242 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS APACHE CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED OPERATIONS (UNAUDITED)
FOR THE QUARTER FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------------ ------------------------ 1999 1998 1999 1998 --------- --------- --------- --------- (In thousands, except per common share data) REVENUES: Oil and gas production revenues $ 338,633 $ 182,801 $ 744,012 $ 590,606 Gathering, processing and marketing revenues 44,961 29,756 105,456 88,872 Other revenues 1,797 (874) 5,274 (1,722) --------- --------- --------- --------- 385,391 211,683 854,742 677,756 --------- --------- --------- --------- OPERATING EXPENSES: Depreciation, depletion and amortization 119,189 94,818 313,010 290,604 Operating costs 60,646 49,344 158,771 158,511 Gathering, processing and marketing costs 44,429 28,970 103,626 86,590 Administrative, selling and other 15,221 13,860 37,685 34,026 Financing costs: Interest expense 33,479 30,167 97,586 90,498 Amortization of deferred loan costs 1,101 1,107 3,316 3,415 Capitalized interest (13,694) (12,883) (39,663) (36,271) Interest income (572) (1,090) (1,396) (3,560) --------- --------- --------- --------- 259,799 204,293 672,935 623,813 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 125,592 7,390 181,807 53,943 Provision for income taxes 52,814 4,189 78,429 24,150 --------- --------- --------- --------- NET INCOME 72,778 3,201 103,378 29,793 Preferred stock dividends 4,947 584 9,503 584 --------- --------- --------- --------- INCOME ATTRIBUTABLE TO COMMON STOCK $ 67,831 $ 2,617 $ 93,875 $ 29,209 ========= ========= ========= ========= NET INCOME PER COMMON SHARE: Basic $ .59 $ .03 $ .89 $ .30 ========= ========= ========= ========= Diluted $ .59 $ .03 $ .88 $ .30 ========= ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part of this statement. 1 3 APACHE CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1999 1998 ----------- ----------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 103,378 $ 29,793 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 313,010 290,604 Amortization of deferred loan costs 3,316 3,415 Provision for deferred income taxes 41,912 2,771 Other (623) 364 Cash distributions in excess of earnings of affiliates -- 1,523 Changes in operating assets and liabilities: (Increase) decrease in receivables (116,188) 54,338 Increase in advances to oil and gas ventures and other (8,388) (3,510) (Increase) decrease in deferred charges and other (3,132) 16,276 Increase (decrease) in payables 51,100 (62,585) Increase (decrease) in accrued expenses 14,798 (3,988) Increase (decrease) in advances from gas purchaser (17,808) 56,891 Increase (decrease) in deferred credits and noncurrent liabilities 8,006 (4,486) ----------- ----------- Net cash provided by operating activities 389,381 381,406 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (425,698) (512,515) Acquisition of Shell properties (687,632) -- Acquisition of British-Borneo interests, net of cash acquired (83,590) -- Non-cash portion of net oil and gas property additions (42,015) (29,130) Proceeds received from sales of property and equipment 149,737 130,753 Proceeds from sale of assets held for resale -- 62,998 Proceeds from sale of stock held for investment -- 26,147 Other, net (9,983) (15,418) ----------- ----------- Net cash used in investing activities (1,099,181) (337,165) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings 733,758 446,248 Payments on long-term debt (645,872) (498,420) Dividends paid (29,331) (20,335) Proceeds from issuance of preferred stock 210,490 98,630 Common stock activity, net 456,459 1,085 Treasury stock activity, net (12,072) (21,430) Cost of debt and equity transactions (1,495) (420) ----------- ----------- Net cash provided by financing activities 711,937 5,358 ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 2,137 49,599 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 14,537 9,686 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,674 $ 59,285 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of this statement. 2 4 APACHE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ (In thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 16,674 $ 14,537 Receivables 272,977 159,806 Inventories 44,935 40,948 Advances to oil and gas ventures and other 20,585 11,679 ------------- ------------ 355,171 226,970 ------------- ------------ PROPERTY AND EQUIPMENT: Oil and gas, on the basis of full cost accounting: Proved properties 6,786,938 5,901,863 Unproved properties and properties under development, not being amortized 808,758 637,854 Gas gathering, transmission and processing facilities 414,544 354,506 Other 97,718 88,422 ------------- ------------ 8,107,958 6,982,645 Less: Accumulated depreciation, depletion and amortization (3,576,608) (3,255,104) ------------- ------------ 4,531,350 3,727,541 ------------- ------------ OTHER ASSETS: Deferred charges and other 41,015 41,551 ------------- ------------ $ 4,927,536 $ 3,996,062 ============= ============
The accompanying notes to consolidated financial statements are an integral part of this statement. 3 5 APACHE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ----------- ----------- (In thousands) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 24,307 $ 15,500 Accounts payable 169,908 115,111 Accrued operating expense 21,759 18,990 Accrued exploration and development 79,013 120,855 Accrued compensation and benefits 16,161 10,692 Accrued interest 25,489 19,054 Other accrued expenses 5,977 5,572 ----------- ----------- 342,614 305,774 ----------- ----------- LONG-TERM DEBT 1,422,337 1,343,258 ----------- ----------- DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES: Income taxes 332,596 270,493 Advances from gas purchaser 187,660 205,468 Other 76,439 69,236 ----------- ----------- 596,695 545,197 ----------- ----------- SHAREHOLDERS' EQUITY: Preferred stock, no par value, 5,000,000 shares authorized - Series B, 5.68% Cumulative Preferred Stock, 100,000 shares issued and outstanding 98,387 98,387 Series C, 6.5% Conversion Preferred Stock, 140,000 shares issued and outstanding 210,490 -- Common stock, $1.25 par, 215,000,000 shares authorized, 116,390,278 and 99,790,337 shares issued, respectively 145,488 124,738 Paid-in capital 1,708,876 1,245,738 Retained earnings 474,169 403,098 Treasury stock, at cost, 2,307,036 and 2,021,215 shares, respectively (48,736) (36,924) Accumulated other comprehensive income (22,784) (33,204) ----------- ----------- 2,565,890 1,801,833 ----------- ----------- $ 4,927,536 $ 3,996,062 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of this statement. 4 6 APACHE CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY (UNAUDITED)
PREFERRED PREFERRED COMPREHENSIVE STOCK STOCK COMMON PAID-IN (In thousands) INCOME SERIES B SERIES C STOCK CAPITAL --------------- ------------ ------------ ----------- -------------- BALANCE AT DECEMBER 31, 1997 $ -- $ -- $ 118,098 $ 1,085,063 Comprehensive income: Net income $ 29,793 -- -- -- -- Currency translation adjustments (11,913) -- -- -- -- --------------- Comprehensive income $ 17,880 =============== Dividends: Preferred -- -- -- -- Common ($.21 per share) -- -- -- -- Preferred shares issued 98,515 -- -- -- Common shares issued -- -- 6,626 153,124 Treasury shares purchased, net -- -- -- -- ------------ ------------ ----------- -------------- BALANCE AT SEPTEMBER 30, 1998 $ 98,515 $ -- $ 124,724 $ 1,238,187 ============ ============ =========== ============== BALANCE AT DECEMBER 31, 1998 $ 98,387 $ -- $ 124,738 $ 1,245,738 Comprehensive income: Net income $ 103,378 -- -- -- -- Currency translation adjustments 9,932 -- -- -- -- Unrealized gain on marketable securities, net of applicable income taxes of $293 488 -- -- -- -- --------------- Comprehensive income $ 113,798 =============== Dividends: Preferred -- -- -- -- Common ($.21 per share) -- -- -- -- Preferred shares issued -- 210,490 -- -- Common shares issued -- -- 20,750 463,138 Treasury shares purchased, net -- -- -- -- ------------ ------------ ----------- -------------- BALANCE AT SEPTEMBER 30, 1999 $ 98,387 $ 210,490 $ 145,488 $ 1,708,876 ============ ============ =========== ============== ACCUMULATED OTHER TOTAL RETAINED TREASURY COMPREHENSIVE SHAREHOLDERS' (In thousands) EARNINGS STOCK INCOME EQUITY ------------ ------------ --------------- --------------- BALANCE AT DECEMBER 31, 1997 $ 561,981 $ (15,506) $ (20,459) $ 1,729,177 Comprehensive income: Net income 29,793 -- -- 29,793 Currency translation adjustments -- -- (11,913) (11,913) Comprehensive income Dividends: Preferred (584) -- -- (584) Common ($.21 per share) (20,647) -- -- (20,647) Preferred shares issued -- -- -- 98,515 Common shares issued -- -- -- 159,750 Treasury shares purchased, net -- (21,430) -- (21,430) ------------ ------------ --------------- --------------- BALANCE AT SEPTEMBER 30, 1998 $ 570,543 $ (36,936) $ (32,372) $ 1,962,661 ============ ============ =============== =============== BALANCE AT DECEMBER 31, 1998 $ 403,098 $ (36,924) $ (33,204) $ 1,801,833 Comprehensive income: Net income 103,378 -- -- 103,378 Currency translation adjustments -- -- 9,932 9,932 Unrealized gain on marketable securities, net of applicable income taxes of $293 -- -- 488 488 Comprehensive income Dividends: Preferred (9,503) -- -- (9,503) Common ($.21 per share) (22,804) -- -- (22,804) Preferred shares issued -- -- -- 210,490 Common shares issued -- -- -- 483,888 Treasury shares purchased, net -- (11,812) -- (11,812) ------------ ------------ --------------- --------------- BALANCE AT SEPTEMBER 30, 1999 $ 474,169 $ (48,736) $ (22,784) $ 2,565,890 ============ ============ =============== ===============
The accompanying notes to consolidated financial statements are an integral part of this statement. 5 7 APACHE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) These financial statements have been prepared by Apache Corporation (Apache or the Company) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods, on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and the summary of significant accounting policies and notes thereto included in the Company's most recent annual report on Form 10-K. 1. ACQUISITIONS AND DIVESTITURES Acquisitions - On February 1, 1999, the Company acquired oil and gas properties located in the Gulf of Mexico from Petsec Energy Inc. (Petsec) for an adjusted purchase price of approximately $66.7 million. The Petsec transaction included estimated proved reserves of approximately 10.2 million barrels of oil equivalent (MMboe) as of the effective date. On May 18, 1999, Apache acquired from Shell Offshore Inc. and affiliated Shell entities (Shell) its interest in 22 producing fields and 16 undeveloped blocks located in the Gulf of Mexico. The Shell transaction also included certain production-related assets and proprietary 3D seismic data covering approximately 1,000 blocks in the Gulf of Mexico. The purchase price, subject to post closing adjustments, was $687.6 million in cash and one million shares of Apache common stock (valued at $28.125 per share). The Shell transaction included estimated proved reserves of approximately 123.2 MMboe as of the effective date. The Shell transaction has been accounted for using the purchase method of accounting and is included in the Company's financial statements from mid-May of 1999, the date the transaction was completed. The unaudited pro forma disclosure below presents results as if the Company had owned the properties for the entire nine months. The pro forma information is based on numerous assumptions and is not necessarily indicative of future results of operations.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 --------------------------------------------- AS REPORTED PRO FORMA ---------------- --------------- (In thousands, except per common share data) Revenues $ 854,742 $ 929,679 Net income 103,378 118,656 Preferred stock dividends 9,503 14,792 Income attributable to common stock 93,875 103,864 Net income per common share: Basic $ .89 $ .91 Diluted .88 .91 Average common shares outstanding 105,874 113,878
On June 18, 1999, the Company acquired a 10 percent interest in the East Spar Joint Venture and an 8.4 percent interest in the Harriet Joint Venture, both located in the Carnarvon Basin (offshore Western Australia), from British-Borneo Oil and Gas Plc (British-Borneo) in exchange for $83.6 million cash and working interests in 11 leases in the Gulf of Mexico. The British-Borneo transaction included estimated proved reserves of approximately 15.9 MMboe as of the effective date. 6 8 The purchase price was allocated to the assets purchased and the liabilities assumed based upon the fair values on the date of acquisition, as follows (in thousands): Value of properties acquired, including gathering and transportation facilities $ 98,582 Value of Gulf of Mexico leases (3,209) Working capital acquired, net 4,123 Deferred income tax liability (15,906) --------------- Cash paid, net of cash acquired $ 83,590 ===============
On October 5, 1999, Apache entered into an agreement with Shell Canada Limited (Shell Canada) to acquire producing properties and other assets for C$770 million (US$523.6 million at September 30, 1999). The producing properties consist of 150,400 net acres and comprise 20 fields with an average working interest of 55 percent and proved reserves of 87.5 MMboe. Apache will also acquire 294,294 net acres of undeveloped leaseholdings, 100 percent interest in a gas processing plant with a potential throughput capacity of 160 million cubic feet (MMcf) per day, and 52,700 square miles of 2-D seismic and 884 square miles of 3-D seismic. The Shell Canada transaction will be effective November 1, 1999, and is expected to close no later than November 30, 1999. Apache plans to fund the purchase with cash on hand and borrowings under its global credit facility or commercial paper program. Divestitures - On September 3, 1999, Apache sold its holdings in the Ivory Coast by selling its wholly owned subsidiary, Apache Cote d'Ivoire Petroleum LDC, for a total sales price of $46.1 million to a consortium consisting of Mondoil Cote d'Ivoire LLC and Saur Energie Cote d'Ivoire. The sale consisted of 13.7 MMboe of proved reserves and the gain was recorded to Other Revenues. Additionally, during the nine months ended September 30, 1999, Apache sold 27.8 MMboe of proved reserves in several transactions from largely marginal North American properties, collecting cash of $103.6 million. 2. NON-CASH INVESTING AND FINANCING ACTIVITIES A summary of non-cash investing or financing activities is presented below: In May 1999, the Company issued one million shares of Apache common stock valued at $28.1 million to Shell in connection with the transaction discussed in Note 1. In June 1999, the Company acquired certain oil and gas interests from British-Borneo for cash and the assumption of certain liabilities. The accompanying financial statements include the amounts detailed in Note 1. The following table provides supplemental disclosure of cash flow information:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------- 1999 1998 ----------- ----------- (In thousands) Cash paid during the period for: Interest (net of amounts capitalized) $ 51,488 $ 52,095 Income taxes (net of refunds) 36,517 21,379
3. DEBT In March 1999, Apache Finance Pty Ltd (Apache Finance) issued $100 million principal amount, $99.3 million net of discount, of senior unsecured 7-percent notes due March 15, 2009. The notes are irrevocably and unconditionally guaranteed by Apache. Apache Finance has the right to redeem the notes prior to maturity, under certain conditions related to changes in relevant tax laws. Also, upon certain changes in control, these notes are subject to mandatory repurchase. The proceeds were used to reduce outstanding indebtedness under the Australian portion of the global credit facility. 7 9 In June 1999, the Company issued $150 million principal amount, $149.1 million net of discount, of senior unsecured 7.625-percent notes due July 1, 2019. The Company does not have the right to redeem the notes prior to maturity. Upon certain changes in control, these notes are subject to mandatory repurchase. The proceeds were used to reduce the Company's outstanding amounts of commercial paper. On November 2, 1999, Apache filed a shelf registration for $400 million of debt securities. Proceeds from the debt securities, being offered by Apache Finance Canada Corporation (Apache Finance Canada), may be used to finance and invest in Apache's Canadian operations, to repay outstanding debt, for working capital, capital expenditures and acquisitions. 4. NET INCOME PER COMMON SHARE A reconciliation of the components of basic and diluted net income per common share is presented in the table below:
FOR THE QUARTER ENDED SEPTEMBER 30, -------------------------------------------------------------------------- 1999 1998 ------------------------------------ ------------------------------------ INCOME SHARES PER SHARE INCOME SHARES PER SHARE ---------- ----------- ----------- ----------- ----------- ---------- (In thousands, except per share amounts) BASIC: Income attributable to common stock $ 67,831 114,088 $ .59 $ 2,617 98,205 $ .03 =========== ========== EFFECT OF DILUTIVE SECURITIES: Stock option plans -- 735 -- 132 ---------- ----------- ----------- ---------- DILUTED: Income attributable to common stock after assumed conversions $ 67,831 114,823 $ .59 $ 2,617 98,337 $ .03 ========== =========== =========== =========== ========== ==========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------------------------------------------- 1999 1998 ------------------------------------ ------------------------------------ INCOME SHARES PER SHARE INCOME SHARES PER SHARE ---------- ----------- ----------- ----------- ---------- ----------- (In thousands, except per share amounts) BASIC: Income attributable to common stock $ 93,875 105,874 $ .89 $ 29,209 98,131 $ .30 =========== =========== EFFECT OF DILUTIVE SECURITIES: Stock option plans -- 408 -- 299 ---------- ----------- ----------- ---------- DILUTED: Income attributable to common stock after assumed conversions $ 93,875 106,282 $ .88 $ 29,209 98,430 $ .30 ========== =========== =========== =========== ========== ===========
The 6-percent convertible subordinated debentures were not included in the computation of diluted net income per common share for the nine months ended September 30, 1998, because to do so would have been antidilutive. Such debentures were converted into shares of Apache common stock or redeemed in January 1998. The Conversion Preferred Stock, Series C, was not included in the computation of diluted net income per common share during 1999, because to do so would have been antidilutive. 5. CAPITAL STOCK In May 1999, Apache issued 14,950,000 shares ($463.5 million) of Apache common stock and 140,000 shares ($217 million) of Automatically Convertible Equity Securities, Conversion Preferred Stock, Series C (the Preferred Stock) in the form of seven million depositary shares each representing 1/50th of a share of Preferred Stock (Depositary Shares). The Preferred Stock is not subject to a sinking fund or mandatory redemption. On May 15, 2002, each Depositary Share will automatically convert, subject to adjustments, into not more than one share and not 8 10 less than 0.8197 of a share of Apache common stock, depending on the market price of Apache common stock at that time. At any time prior to May 15, 2002, holders of the Depositary Shares may elect to convert each of their shares, subject to adjustments, into not less than 0.8197 of a share of Apache Common Stock (5,737,900 common shares). Holders of the shares are entitled to receive cumulative cash dividends at an annual rate of $2.015 per Depositary Share when, and if, declared by Apache's board of directors. The net proceeds from both offerings of approximately $654.8 million were used for general corporate purposes, including funding of a portion of the purchase price for the Shell transaction. 6. BUSINESS SEGMENT INFORMATION Apache has five reportable segments which are primarily in the business of natural gas and crude oil exploration and production. The Company evaluates performance based on profit or loss from oil and gas operations before income and expense items incidental to oil and gas operations and income taxes. Apache's reportable segments are managed separately because of their geographic locations. Financial information by operating segment is presented below:
OTHER UNITED STATES CANADA EGYPT AUSTRALIA INTERNATIONAL TOTAL ------------- ------------ ------------ ------------ ------------- ----------- (IN THOUSANDS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 Oil and Gas Production Revenues...... $ 466,517 $ 54,791 $ 143,618 $ 77,149 $ 1,937 $ 744,012 ============= ============ ============ ============ ============= =========== Operating Income (1)................. $ 151,775 $ 18,472 $ 73,103 $ 30,279 $ 432 $ 274,061 ============= ============ ============ ============ ============= Other Income (Expense): Other revenues.................... 5,274 Administrative, selling and other. (37,685) Financing costs, net.............. (59,843) ----------- Income Before Income Taxes........... $ 181,807 =========== Total Assets......................... $ 2,785,853 $ 332,301 $ 897,328 $ 766,164 $ 145,890 $ 4,927,536 ============= ============ ============ ============ ============= =========== FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 Oil and Gas Production Revenues...... $ 390,946 $ 44,233 $ 103,726 $ 51,701 $ -- $ 590,606 ============= ============ ============ ============ ============= =========== Operating Income (1)................. $ 77,821 $ 9,117 $ 43,437 $ 13,398 $ -- $ 143,773 ============= ============ ============ ============ ============= Other Income (Expense): Other revenues.................... (1,722) Administrative, selling and other. (34,026) Financing costs, net.............. (54,082) ----------- Income Before Income Taxes........... $ 53,943 =========== Total Assets......................... $ 2,338,751 $ 297,362 $ 815,541 $ 563,628 $ 129,012 $ 4,144,294 ============= ============ ============ ============ ============= ===========
(1) Operating income consists of oil and gas production revenues and net gathering, processing and marketing activity, less depreciation, depletion and amortization (DD&A) expense and operating costs. 9 11 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Early in 1998, when the cost of drilling for and acquiring oil and gas reserves was rising rapidly, Apache implemented a two-phase strategy designed to reduce debt and pursue larger acquisitions after the prices of oil and gas properties had turned down. By the end of 1998, Apache had paid down approximately $160 million in debt and added approximately $73 million to shareholders' equity as compared to year-end 1997 levels. These results were achieved in part by selling and trading non-strategic properties, curtailing capital expenditures, and converting debentures into common stock. Apache's strengthened balance sheet put the company in a better position to endure the impact of low oil and gas prices in 1998 and the first quarter of 1999, and to negotiate an agreement with Shell to acquire a package of properties located offshore in the Gulf of Mexico. That acquisition constituted the largest transaction in the Company's history in terms of purchase price and quantity of proved reserves acquired. Production from the acquired properties was first recorded in the second quarter of 1999. On October 5, 1999, Apache entered into an agreement with Shell Canada to acquire 20 fields with an average working interest of 55 percent and proved reserves of 87.5 MMboe and other assets. Apache's results of operations and financial position for the first nine months of 1999, were significantly impacted by the following factors: Commodity Prices - Apache's average realized oil price increased $3.27 per barrel from $13.20 per barrel in the first nine months of 1998 to $16.47 per barrel in the comparable 1999 period, increasing revenues by $66.4 million. The average realized price for natural gas increased $.10 per thousand cubic feet (Mcf) from $1.95 per Mcf in the first nine months of 1998 to $2.05 per Mcf in 1999, positively impacting revenues by $17.0 million. Operations - Oil production increased 14 percent during the first nine months of 1999 when compared to the same period last year. The increase was primarily due to the acquisition from Shell in the U.S., included since mid-May of 1999, the acquisition of certain oil and gas interests in the Carnarvon Basin, offshore Western Australia, from subsidiaries of Novus Petroleum Limited (Novus) in November 1998 and the full-period impact of production from Australia's Stag field which began in May 1998. The increase in oil production positively impacted revenues by $47.4 million. Gas production increased six percent which positively impacted revenues by $20.2 million. RESULTS OF OPERATIONS Apache reported 1999 third quarter income attributable to common stock of $67.8 million versus income of $2.6 million in the prior year. Basic net income per common share of $.59 for the third quarter of 1999 was significantly higher than the $.03 reported in 1998. A significant increase in oil and gas production revenues was partially offset by higher DD&A expense, operating costs, preferred stock dividends, net financing costs and administrative, selling and other (G&A) expense. For the first nine months of 1999, net income of $93.9 million, or $.89 per share, compared to $29.2 million, or $.30 per share, in the comparable 1998 period. The increase resulted primarily from higher oil and gas production revenues partially offset by higher DD&A expense (although DD&A per boe is lower), preferred stock dividends, net financing costs and G&A expense. For the third quarter of 1999, revenues increased 82 percent to $385.4 million compared to $211.7 million in 1998, driven by an 85 percent increase in oil and gas production revenues. The increase in oil and gas production revenues was the result of a 64 percent increase in the average realized oil price, a 36 percent increase in oil production, a 20 percent increase in natural gas production and a 27 percent increase in the average realized price for natural gas. Crude oil, including natural gas liquids, contributed 55 percent and natural gas contributed 45 percent of oil and gas production revenues. For the first nine months of 1999, total revenues increased 26 percent to $854.7 million as compared to $677.8 million for the same period in 1998. Revenues from oil and gas production increased 26 percent over the same period in 1998, with crude oil, including natural gas liquids, contributing 53 percent and natural gas contributing 47 percent of total oil and gas production revenues. 10 12 Volume and price information for the Company's oil and gas production is summarized in the following table:
FOR THE QUARTER ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- --------------------------------------- INCREASE INCREASE 1999 1998 (DECREASE) 1999 1998 (DECREASE) ------------- ------------- ---------- ------------ ------------ ----------- Natural Gas Volume - Mcf per day: United States 495,226 413,818 20% 447,010 443,546 1% Canada 92,885 107,651 (14)% 100,115 101,102 (1)% Egypt 16,615 2,044 713% 8,155 986 727% Australia 85,603 52,544 63% 71,786 48,988 47% Ivory Coast 3,470 -- -- 3,674 -- -- ------------- ------------- ------------ ------------ Total 693,799 576,057 20% 630,740 594,622 6% ============= ============= ============ ============ Average Natural Gas price - Per Mcf: United States $ 2.58 $ 2.07 25% $ 2.22 $ 2.14 4% Canada 1.89 1.28 48% 1.64 1.30 26% Egypt 3.45 1.68 105% 3.10 1.78 74% Australia 1.52 1.43 6% 1.51 1.52 (1)% Ivory Coast 1.71 -- -- 1.72 -- -- Total 2.37 1.86 27% 2.05 1.95 5% Oil Volume - Barrels per day: United States 51,994 31,691 64% 42,611 35,330 21% Canada 2,082 2,107 (1)% 2,110 2,067 2% Egypt 33,163 27,892 19% 30,415 28,801 6% Australia 9,936 9,717 2% 9,905 8,359 18% Ivory Coast 51 -- -- 49 -- -- ------------- ------------- ------------ ------------ Total 97,226 71,407 36% 85,090 74,557 14% ============= ============= ============ ============ Average Oil price - Per barrel: United States $ 19.80 $ 12.19 62% $ 16.29 $ 13.14 24% Canada 19.31 11.70 65% 14.98 13.12 14% Egypt 20.90 12.60 66% 16.47 13.13 25% Australia 23.33 13.29 76% 17.57 13.75 28% Ivory Coast 18.11 -- -- 15.68 -- -- Total 20.52 12.49 64% 16.47 13.20 25% Natural Gas Liquids (NGL) Volume - Barrels per day: United States 3,583 2,025 77% 2,887 2,010 44% Canada 583 577 1% 605 613 (1)% ------------- ------------- ------------ ------------ Total 4,166 2,602 60% 3,492 2,623 33% ============= ============= ============ ============ Average NGL Price - Per barrel: United States $ 9.08 $ 9.09 -- $ 8.52 $ 8.58 (1)% Canada 12.80 6.09 110% 8.59 6.52 32% Total 9.60 8.43 14% 8.53 8.10 5%
THIRD QUARTER 1999 COMPARED TO THIRD QUARTER 1998 Natural gas sales for the third quarter of 1999 totaled $151.4 million, 53 percent higher than the third quarter of 1998. Average realized natural gas prices increased 27 percent, positively affecting revenue by $26.9 million. The Company periodically engages in hedging activities, including fixed price physical and financial contracts. The net result of these activities decreased the Company's realized gas price by $.02 per Mcf during the third quarter of 1999 and increased the realized gas price by $.06 for the same period in 1998. Natural gas production increased 118 million cubic feet per day (MMcf/d), or 20 percent, on a worldwide basis, positively impacting revenue by $25.7 million. Increases were driven by the Shell transaction in the United States and Australian acquisition activity. To a lesser extent, initial production from the Western Desert Pipeline from the Khalda concession contributed to the overall increase. 11 13 The Company's crude oil sales for the third quarter of 1999 totaled $183.6 million, a 124 percent increase from the third quarter of 1998, due to increased average realized prices and production volumes. Third quarter 1999 oil production increased 36 percent compared to the prior year primarily the result of a 64 percent increase in the United States attributable to production from the Shell properties acquired in the second quarter of 1999. Egyptian oil production increased 19 percent in the third quarter of 1999 as a result of the price-driven dynamics of certain production sharing contracts and to a lesser extent, drilling and development activity. The Company's realized price for sales of crude oil in the third quarter of 1999 increased $8.03 per barrel, or 64 percent, resulting in an increase in revenue of $52.8 million compared to the same period in 1998. The Company periodically engages in hedging activities, including fixed price physical and financial contracts. The net result of these activities decreased the Company's realized oil price by $.11 per barrel during the third quarter of 1999, and had no impact on the Company's realized price during the third quarter of 1998. Revenue from the sale of natural gas liquids totaled $3.7 million for the third quarter of 1999, compared to $2.0 million for the third quarter of 1998 in response to a 60 percent increase in natural gas liquids production and a 14 percent improvement in realized prices. Apache initiated production offshore the Ivory Coast in the first quarter of 1999. First sales of natural gas were delivered in March 1999. On September 3, 1999, Apache sold its Ivory Coast subsidiary for $46.1 million. YEAR-TO-DATE 1999 COMPARED TO YEAR-TO-DATE 1998 Natural gas sales for the first nine months of 1999 of $353.3 million increased $37.3 million, or 12 percent, from those recorded in the same period of 1998 primarily as a result of increased production volumes and realized prices. Average realized natural gas prices increased five percent, positively affecting revenue by $17.0 million. U.S. natural gas production, which comprised 71 percent of the Company's worldwide gas production, sold at an average price of $2.22 per Mcf, four percent higher than in 1998, positively impacting natural gas sales by $8.7 million. Natural gas production increased 36 MMcf/d, or six percent, on a worldwide basis, favorably impacting revenue by $20.2 million. Development activities and the impact of producing property acquisitions during late 1998 increased natural gas production in Australia by 23 MMcf/d. The Company periodically engages in hedging activities, including fixed price physical and financial contracts. The net result of these activities increased the Company's realized gas price by $.02 per Mcf during the first nine months of 1999 and by $.06 per Mcf during the same period of 1998. For the first nine months of 1999, oil revenues of $382.6 million increased $113.8 million, or 42 percent, from the same period in 1998 due to improved production and higher oil prices. On a worldwide basis, average oil prices increased $3.27 per barrel, or 25 percent, to $16.47 per barrel positively impacting oil sales by $66.4 million. Oil production increased 10,533 barrels per day, or 14 percent, for the first nine months of 1999 primarily due to increases in the United States. Domestic oil production increased 7,281 barrels per day, or 21 percent, primarily due to the Shell acquisition. The Company periodically engages in hedging activities, including fixed price physical and financial contracts. The net result of these activities decreased the Company's realized oil price by $.04 per barrel during the first nine months of 1999, and had no impact on the Company's realized price during the first nine months of 1998. Natural gas liquids revenues for the first nine months of 1999 of $8.1 million increased $2.3 million, or 40 percent, from the same period in 1998. Natural gas liquids production increased 869 barrels per day, or 33 percent and natural gas liquids prices increased by $.43 per barrel, or five percent. OTHER REVENUES AND OPERATING EXPENSES During the third quarter and first nine months of 1999, Apache's gas gathering, processing and marketing revenues increased 51 percent and 19 percent, respectively, to $45.0 million and $105.5 million, as a result of increases in volumes and prices in both periods. While revenues increased with respect to these activities, there was a greater increase in gas gathering, processing and marketing costs for the first nine months of 1999, thus lower margins were realized for this period as compared to 1998. 12 14 Other revenues for the third quarter of 1999 and the first nine months of 1999 were $1.8 million and $5.3 million, respectively, primarily consisting of the gain on the sale of the Company's Ivory Coast subsidiary. The Company's DD&A expense for the third quarter and first nine months of 1999 totaled $119.2 million and $313.0 million, respectively, compared to $94.8 million and $290.6 million for the comparable periods in 1998. On an equivalent barrel basis, full cost DD&A expense decreased $.02 per barrel of oil equivalent (boe), from $5.64 per boe in the third quarter of 1998 to $5.62 per boe for the same period in 1999. For the nine months ended September 30, 1999, the full cost DD&A rate totaled $5.56 per boe compared to $5.62 per boe in 1998. United States production accounted for 62 percent of worldwide production in the first nine months of 1999, and 63 percent in the first nine months of 1998. An eight percent increase in United States production and a $.01 decrease in the DD&A rate for the first nine months of 1999 as compared to 1998, accounted for the decrease in the overall rate. Operating costs, including lease operating expense and severance taxes, increased 23 percent from $49.3 million in the third quarter of 1998 to $60.6 million for the same period in 1999. For the first nine months of 1999, operating costs totaled $158.8 million, slightly higher than the $158.5 million for the same period in 1998. For the third quarter and first nine months of 1999, lease operating expense, excluding severance taxes, totaled $51.1 million and $136.7 million, respectively, compared to $43.3 million and $136.5 million for the comparable periods in 1998. On an equivalent barrel basis, lease operating expense decreased from $2.77 per boe in the third quarter of 1998 to $2.56 per boe in the third quarter of 1999. For the first nine months of 1999, lease operating expense averaged $2.59 per boe, a nine percent decrease from $2.84 per boe, for the same period in 1998. Domestic per unit costs were significantly reduced due to lower Gulf Coast region repairs, maintenance, power and fuel costs resulting from the sale of marginal properties, and by lower Western region repairs and maintenance costs. G&A expense in the third quarter and first nine months of 1999 increased $1.4 million or ten percent, and $3.7 million or 11 percent, respectively, from a year ago. These increases were the result of planned spending increases. On an equivalent barrel basis, G&A expense remained constant at $.71 per boe, for the first nine months of 1999 and 1998. Net financing costs for the third quarter of 1999 increased $3.0 million, or 17 percent, from the prior year due to higher gross interest expense and reduced interest income, mitigated by higher capitalized interest. Gross interest expense increased $3.3 million due to a higher average outstanding debt balance. Net financing costs increased 11 percent from $54.1 million in the first nine months of 1998 to $59.8 million in the comparable 1999 period due to higher average debt outstanding and reduced interest income, partially offset by an increase in capitalized interest. Additional capitalized interest associated with the construction of Egyptian pipeline projects contributed to the increase. The decrease in interest income was due to a lower cash balance in the first nine months of 1999. MARKET RISK COMMODITY RISK The Company's major market risk exposure continues to be the pricing applicable to its oil and gas production. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to its United States and Canadian natural gas production. Historically, prices received for oil and gas production have been volatile and unpredictable. Price volatility is expected to continue. See "Results of Operations" above. The information set forth under "Market Risk - Interest Rate Risk and - Foreign Currency Risk" in Item 7 of the Company's annual report on Form 10-K for the year ended December 31, 1998, is incorporated herein by reference. 13 15 CASH FLOW, LIQUIDITY AND CAPITAL RESOURCES CAPITAL COMMITMENTS Apache's primary cash needs are for exploration, development and acquisition of oil and gas properties, repayment of principal and interest on outstanding debt, payment of dividends and capital obligations for affiliated ventures. Apache budgets capital expenditures based upon projected cash flow and routinely adjusts its capital expenditures in response to changes in oil and natural gas prices and corresponding changes in cash flow. The Company is not in a position to predict future product prices. Capital expenditures, including acquisitions, for 1999 are expected to exceed internally generated cash flow. Capital Expenditures - A summary of oil and gas capital expenditures during the first nine months of 1999 and 1998 is presented below (in millions):
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------ 1999 1998 ------------ ------------ Exploration and development: United States $ 127.4 $ 173.4 Canada 24.1 55.1 Egypt 42.5 80.3 Australia 41.1 60.3 Other international 17.4 35.1 ------------ ------------ 252.5 404.2 Capitalized Interest 39.7 36.3 ------------ ------------ Total $ 292.2 $ 440.5 ============ ============ Acquisition of oil and gas properties $ 893.8 $ 18.2 ============ ============
In North America, Apache completed 81 producing wells out of 97 wells drilled during the first nine months of 1999, while internationally the Company discovered 38 new producers out of 51 wells drilled. Worldwide, the Company was drilling or completing an additional 69 wells as of September 30, 1999. In addition, Apache completed 288 production enhancement projects, including 128 recompletions, during the first nine months of 1999. Property acquisitions in the first nine months of 1999, primarily represented acquisitions of producing properties in the Company's existing focus areas. On February 1, 1999, the Company acquired oil and gas properties located in the Gulf of Mexico from Petsec for an adjusted purchase price of approximately $66.7 million. The Petsec transaction included estimated proved reserves of approximately 10.2 MMboe as of the effective date. On May 18, 1999, Apache acquired from Shell its interest in 22 producing fields and 16 undeveloped blocks located in the Gulf of Mexico. The Shell transaction also included certain production-related assets and proprietary 3D seismic data covering approximately 1,000 blocks in the Gulf of Mexico. The purchase price, subject to post closing adjustments, was $687.6 million in cash and one million shares of Apache common stock (valued at $28.125 per share). The Shell transaction included estimated proved reserves of approximately 123.2 MMboe as of the effective date. On June 18, 1999, the Company acquired a 10 percent interest in the East Spar Joint Venture and an 8.4 percent interest in the Harriet Joint Venture, both located in the Carnarvon Basin (offshore Western Australia), from British-Borneo in exchange for $83.6 million cash and working interests in 11 leases in the Gulf of Mexico. The British-Borneo transaction included estimated proved reserves of approximately 15.9 MMboe as of the effective date. 14 16 CAPITAL RESOURCES AND LIQUIDITY Net Cash Provided by Operating Activities - Apache's net cash provided by operating activities during the first nine months of 1999 totaled $389.4 million, an increase of two percent from $381.4 million in the first nine months of 1998. This increase was primarily due to an increase in oil and gas prices and production. Stock Transactions - In May 1999, Apache issued 14,950,000 shares ($463.5 million) of Apache common stock and 140,000 shares ($217 million) of the Preferred Stock in the form of seven million Depositary Shares each representing 1/50th of a share of the Preferred Stock. The Preferred Stock is not subject to a sinking fund or mandatory redemption. On May 15, 2002, each Depositary Share will automatically convert, subject to adjustments, into not more than one share and not less than 0.8197 of a share of Apache common stock, depending on the market price of Apache common stock at that time. In the third quarter, the Company purchased 300,000 Treasury Shares at an average price of $40.20 per share. Long-Term Borrowings - In March 1999, Apache Finance issued $100 million principal amount, $99.3 million net of discount, of senior unsecured 7-percent notes due March 15, 2009. The notes are irrevocably and unconditionally guaranteed by Apache. Apache Finance has the right to redeem the notes prior to maturity, under certain conditions related to changes in relevant tax laws. Also, upon certain changes in control, these notes are subject to mandatory repurchase. The proceeds were used to reduce outstanding indebtedness under the Australian portion of the global credit facility. In June 1999, the Company issued $150 million principal amount, $149.1 million net of discount, of senior unsecured 7.625-percent notes due July 1, 2019. The Company does not have the right to redeem the notes prior to maturity. Upon certain changes in control, these notes are subject to mandatory repurchase. The proceeds were used to reduce the Company's outstanding amounts of commercial paper. Liquidity - The Company had $16.7 million in cash and cash equivalents on hand at September 30, 1999, up from $14.5 million at December 31, 1998. Apache's ratio of current assets to current liabilities at September 30, 1999 was 1.04 compared to .74:1 at December 31, 1998. On November 2, 1999, Apache filed a shelf registration for $400 million of debt securities. The proceeds from the debt securities, being offered by Apache Finance Canada, may be used to finance and invest in Apache's Canadian operations, to repay outstanding debt, for working capital, capital expenditures and acquisitions. Apache believes that cash on hand, net cash generated from operations, and unused committed borrowing capacity under its global credit facility will be adequate to satisfy the Company's financial obligations to meet future liquidity needs for at least the next two fiscal years. As of September 30, 1999, Apache's available borrowing capacity under its global credit facility was $947 million. Capital Commitment - On October 5, 1999, Apache entered into an agreement with Shell Canada to acquire producing properties and other assets for C$770 million (US$523.6 million at September 30, 1999). Apache plans to fund the purchase with cash on hand and borrowings under its global credit facility or commercial paper program. 15 17 IMPACT OF THE YEAR 2000 ISSUE The inability of some computer programs and embedded computer chips to distinguish between the year 1900 and the year 2000 (the Year 2000 issue) poses a serious threat of business disruption to any organization that utilizes computer technology and computer chip technology in their business systems or equipment. Apache has formed a Year 2000 Task Force with representation from major business units to inventory and assess the risk associated with hardware, software, telecommunications systems, office equipment, embedded chip controls and systems, process control systems, facility control systems and dependencies on external trading partners. The project phases, expected completion dates and percentage complete as of September 1999 are as follows:
PERCENT PHASE COMPLETION DATE COMPLETE --------------------------------------- -------------------- -------------- Organization July 1998 100% Assessment November 1998 100% Desktop Computers Network Hardware Software Embedded Systems External Trading Partners Building/Infrastructure Systems Telecommunications Systems Implementation/Replacement November 1999 90% Computer Hardware Core Business Software Desktop Software Embedded Systems Building Systems Contact External Trading Partners March 1999 100% Contingency Planning November 1999 90%
To date, the Company is not aware of any significant Year 2000 issues that would cause problems in the area of safety, environmental or business interruption. The Company has assessed the risks associated with hardware, software, infrastructure, embedded chips and external trading partners that are not Year 2000 compliant. While Apache is confident that Year 2000 remediation efforts will succeed in minimizing exposure to business disruption, plans are being developed that will allow continuation of business in all but the worst case scenarios. All remediation and replacement efforts and contingency planning are expected to be complete by November 1999. All critical external trading partners have been contacted to determine Year 2000 readiness. Such responses indicate they will be compliant by year-end. In 1997, the Company initiated a project to replace existing business software as it relates to Apache's production, land, marketing, accounting and financial systems to more effectively and efficiently meet its business needs. Replacement computer systems selected by the Company from SAP America, Inc., PricewaterhouseCoopers LLP, Innovative Business Solutions and Landmark Graphics will properly recognize dates beyond December 31, 1999. The implementation of the business software project was completed and operational effective with January 1999 production. The Company expects the cost to achieve Year 2000 compliance will not exceed $4 million, excluding the cost of implementing business replacement systems. The Company presently believes that with conversions to new software and completion of efforts planned by the Year 2000 Task Force, the risk associated with Year 2000 will be significantly reduced. However, the Company is unable to assure that the consequences of Year 2000 failures of systems maintained by the Company or by third parties will not materially adversely impact the Company's results of operations, liquidity or financial condition. 16 18 FUTURE TRENDS Apache's strategy is to increase its oil and gas reserves, production, cash flow and earnings through a balanced growth program that involves: 1. exploiting our existing asset base; 2. acquiring properties to which we can add incremental value; and 3. investing in high-potential exploration prospects. EXPLOITING EXISTING ASSET BASE We seek to maximize the value of our existing asset base by reducing operating costs per unit and increasing the amount of recoverable reserves. In order to achieve these objectives, we rigorously pursue operations to cut costs, identify production enhancement initiatives such as workovers and recompletions, and divest marginal and non-strategic properties. ACQUIRING PROPERTIES TO WHICH WE CAN ADD INCREMENTAL VALUE We seek to purchase reserves at appropriate prices by generally avoiding auction processes where we are competing against other buyers. Our aim is to follow each acquisition with a cycle of reserve enhancement, property consolidation and cash flow acceleration, facilitating asset growth and debt reduction. INVESTING IN HIGH-POTENTIAL EXPLORATION PROSPECTS We seek to concentrate our exploratory investments in a select number of international areas and to become the dominant operator in those regions. We believe that these investments, although higher-risk, offer the potential for significant reserve additions. Our international investments and exploration activities are a significant component of our long-term growth strategy. They complement our North American operations, which are more development oriented. A critical component in implementing our three-pronged growth strategy is maintenance of significant financial flexibility. We are committed to preserving a strong balance sheet and credit position that gives us the foundation required to pursue our growth initiatives. CHANGES IN ACCOUNTING PRINCIPLES DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value, and requires that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement of consolidated operations, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting treatment. SFAS No. 133, as amended, is required to be adopted on January 1, 2001, although earlier adoption is permitted. The Company is analyzing the effects of SFAS No. 133, but has not yet quantified the potential financial statement impact, if any, or determined the timing or method of adoption. Management does not believe that the adoption of SFAS No. 133 will have a material impact on the Company's financial condition or results of operations. 17 19 CHINA On May 28, 1999, Apache China Corporation LDC (Apache China), (an indirect wholly owned subsidiary of the Company) sent a notice of default to XCL-China, Ltd. (XCL-China), a participant with Apache China in the Zhao Dong Block offshore the People's Republic of China, and its parent company, XCL, Ltd., for the failure to pay approximately $10 million of costs pursuant to the agreements governing the project. Prior to the expiration of the cure period, XCL-China and XCL, Ltd. filed petitions initiating arbitration proceedings against Apache China. The actions seek to disallow approximately $17 million in costs expended by Apache China related to developing the Zhao Dong Block, including $10 million in costs billed by Apache China to XCL-China that have not been paid. In addition, XCL-China has advised Apache China of XCL-China's intent to seek the removal of Apache China as operator of the Block. Apache China has denied the allegations made by XCL-China in its petition and is vigorously contesting them. On June 25, 1999, Apache China filed a petition in U.S. Bankruptcy Court in Opelousas, Louisiana, to place XCL-China into involuntary bankruptcy on account of XCL-China's failure to pay its share of costs related to development of the Zhao Dong Block. XCL-China has denied the allegations contained in Apache China's petition and has filed a motion to dismiss the petition. Hearings were held in the U.S. Bankruptcy Court in August 1999. FORWARD-LOOKING STATEMENTS AND RISK This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based on our current expectations, estimates and projections. Therefore, they could ultimately prove to be inaccurate. Our plans for capital and exploratory spending and for cost and expense reduction may change if business conditions, such as energy prices and world economic conditions, change. Factors that could affect our ability to be Year 2000 compliant by the end of 1999 include: the failure of our customers and suppliers, government entities and others to achieve compliance and the inaccuracy of any certifications received from them; our inability to identify and remediate every possible problem; and a shortage of necessary programmers, hardware and software. Other factors that may have a direct bearing on our results of operations and financial condition are: o competitive practices in the industries in which we compete; o fluctuations in oil and gas prices that have not been properly hedged or that are inconsistent with our open position in our marketing activities; o operational and systems risks; o environmental liabilities that are not covered by indemnity or insurance; o general economic and capital market conditions, including fluctuations in interest rates; and o the impact of current and future laws and governmental regulations (particularly environmental regulations) affecting the energy industry in general and Apache's operations in particular. In light of these risks, uncertainties and assumptions, the events anticipated by our forward-looking statements might not occur. We undertake no obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise. 18 20 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information set forth in Note 10 to the Consolidated Financial Statements contained in the Company's annual report on Form 10-K for the year ended December 31, 1998 (filed with the SEC on March 25, 1999) is incorporated herein by reference. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None 19 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 12.1 - Statement of computation of ratios of earnings to fixed charges and combined fixed charges and preferred stock dividends. 27.1 - Financial Data Table (b) Reports filed on Form 8-K The following current report on Form 8-K was filed during the fiscal quarter ended September 30, 1999: Amendment No. 1 on Form 8-K/A to Form 8-K dated May 18, 1999 On July 30, 1999, under Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, Apache filed the required financial statement, pro forma financial information and exhibits in connection with Apache's purchase from Shell of (i) Shell's interest in 22 producing fields and 16 undeveloped blocks located in the Gulf of Mexico, (ii) certain production-related assets, and (iii) proprietary seismic data covering over 1,000 blocks in the Gulf of Mexico, which transaction closed on May 18, 1999. 20 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. APACHE CORPORATION Dated: November 11, 1999 /s/ Roger B. Plank ------------------------------------------- Roger B. Plank Vice President and Chief Financial Officer Dated: November 11, 1999 /s/ Thomas L. Mitchell ------------------------------------------- Thomas L. Mitchell Vice President and Controller (Chief Accounting Officer) 23 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 12.1 - Statement of computation of ratios of earnings to fixed charges and combined fixed charges and preferred stock dividends. 27.1 - Financial Data Schedule
EX-12.1 2 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.1 APACHE CORPORATION STATEMENT OF COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, -------------------- 1999 1998 1998 1997 1996 1995 1994 --------- --------- --------- --------- -------- -------- -------- EARNINGS Pretax income (loss) from continuing operations (1) $ 181,807 $ 53,943 $(187,563) $ 258,640 $200,195 $ 33,143 $ 66,234 Add: Fixed charges excluding capitalized interest 65,438 60,430 78,728 78,531 68,091 77,220 39,008 --------- --------- --------- --------- -------- -------- -------- Adjusted Earnings $ 247,245 $ 114,373 $(108,835) $ 337,171 $268,286 $110,363 $105,242 ========= ========= ========= ========= ======== ======== ======== FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Interest expense including capitalized interest (2) $ 97,586 $ 90,498 $ 119,703 $ 105,148 $ 89,829 $ 88,057 $ 37,838 Amortization of debt expense 3,316 3,415 4,496 6,438 5,118 4,665 3,987 Interest component of lease rental expenditures (3) 4,199 2,788 3,808 3,438 3,856 3,539 3,217 --------- --------- --------- --------- -------- -------- -------- Fixed charges 105,101 96,701 128,007 115,024 98,803 96,261 45,042 --------- --------- --------- --------- -------- -------- -------- Preferred stock requirements (4) 16,713 1,057 2,905 -- -- -- -- --------- --------- --------- --------- -------- -------- -------- Combined fixed charges and preferred stock dividends $ 121,814 $ 97,758 $ 130,912 $ 115,024 $ 98,803 $ 96,261 $ 45,042 ========= ========= ========= ========= ======== ======== ======== Ratio of earnings to fixed charges 2.35 1.18 --(5) 2.93 2.72 1.15 2.34 ========= ========= ========= ========= ======== ======== ======== Ratio of earnings to combined fixed charges and preferred stock dividends 2.03 1.17 --(5) 2.93 2.72 1.15 2.34 ========= ========= ========= ========= ======== ======== ========
- ------------------------ (1) Undistributed income of less-than-50%-owned affiliates is excluded. (2) Apache has guaranteed and is contingently liable for certain debt. Fixed charges, relating to the debt for which Apache is contingently liable, have not been included in the fixed charges for any of the periods shown above. (3) Represents the portion of rental expense assumed to be attributable to interest factors of related rental obligations determined at interest rates appropriate for the period during which the rental obligations were incurred. Approximately 32% to 34% applies for all periods presented. (4) Represents the amount of pre-tax earnings that would be required to cover preferred stock dividends. (5) Earnings were inadequate to cover fixed charges and combined fixed charges and preferred stock dividends by $236.8 million and $239.7 million, respectively, due to the $243.2 million write-down of the carrying value of United States oil and gas properties. EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 SEP-30-1999 16,674 0 272,977 0 44,935 355,171 8,107,958 (3,576,608) 4,927,536 342,614 1,422,337 210,490 98,387 145,488 2,111,525 4,927,536 849,468 854,742 575,407 575,407 0 0 59,843 181,807 78,429 93,875 0 0 0 93,875 .89 .88
-----END PRIVACY-ENHANCED MESSAGE-----